In re Ziadeh
| Decision Date | 18 September 2002 |
| Docket Number | Adversary No. 01-9185-C.,Bankruptcy No. 01-01059-C. |
| Citation | 284 B.R. 893 |
| Parties | Ramon K. ZIADEH, Lynda Ziadeh, Debtors. Zio Johnos Inc., Plaintiff, v. Ramon K. Ziadeh, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Iowa |
Renee K. Hanrahan, Cedar Rapids, IA, for Plaintiff.
Michael L. Mollman, Cedar Rapids, IA, for Debtors/Defendants.
The above-captioned matter came on for trial on July 30, 2002 on Plaintiffs' Complaint Objecting to Discharge. Plaintiff Zio Johnos, Inc. was represented by attorney Renee Hanrahan. Debtor/Defendant Ramon K. Ziadeh, d/b/a R.L.Z. Construction, was represented by attorney Michael Mollman. After presentation of evidence and arguments of counsel, the Court took the matter under advisement. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).
Plaintiff Zio Johnos Inc. filed its complaint to determine dischargeability on August 13, 2001. Plaintiff seeks to except a debt from discharge under § 523(a)(2)(A) for fraud or false representations, § 523(a)(4) for fraud in a fiduciary capacity, or § 523(a)(6) for willful and malicious injury by the debtor to another entity.
Plaintiff's claim arises out of a default judgment entered in favor of Plaintiff and against Defendant/Debtor in the Iowa District Court for Johnson County in the amount of $18,760.85 in actual damages. The petition, amended petition, and motion for summary judgment were premised on Debtor's breach of contract, fraudulent misrepresentations, and conversion. The Iowa District Court granted Plaintiff summary judgment on November 1, 2000. Judgment was entered December 1, 2000.
In early 2000, Zio Johnos planned to open a restaurant in Iowa City, Iowa. Elie Khairallah, Vice President of Zio Johnos, Inc., needed a general contractor to remodel the property. Mr. Khairallah entered into a series of negotiations with Debtor in which Debtor represented that he was a knowledgeable and experienced general contractor. Debtor further represented that he was licensed, insured, and bonded. These negotiations resulted in a written contract for remodeling work. The contract provided that Debtor act as General Contractor for the project. This position made Debtor responsible for all aspects of the job, including the hiring and payment of subcontractors. The parties dispute whether the contract obligated Debtor to pay the plumbing costs owed to A'Hearn Plumbing & Heating.
Debtor informed Mr. Khairallah that he needed $26,000 up front to cover the cost of the materials for the job. Debtor told Mr. Khairallah that the money paid by Mr. Khairallah would be administered through a separate checking account and would only be used for the Zio Johnos project. Debtor did open a business checking account at Bank Iowa with the initial funds from the Zio Johnos project.
In addition to the initial payment of $26,000, the agreement between the parties stipulated that Zio Johnos would pay Debtor an additional $3,000 per week when the job began. These periodic payments were to cover labor and materials supplied by both Debtor and the subcontractors. Throughout the duration of the Zio Johnos project, Debtor apparently had no other construction projects nor any other source of income.
Mr. Khairallah testified that in March of 2000, Debtor told him that he needed $30,000 to pay A'Hearn and other workers. Mr. Khairallah gave Debtor the $30,000 which was deposited into the Zio Johnos project checking account. Several days later, Debtor informed Mr. Khairallah that everyone had been paid. Debtor made similar assurances to Mr. Khairallah prior to the April 28, May 16, and May 31, 2000 progress payments.
The record establishes that Debtor misappropriated funds earmarked for the Zio Johnos project. The bank statement and copies of checks written after the $30,000 deposit show that Debtor used funds to make non-business expenditures. These expenditures included:
Investment in stock market $ 5,100.00
Bedroom furniture 1,073.98
Bedding 460.69
House and Auto Insurance 745.00
Central City Athletic Club 10.00
Lawn care 85.05
Utilities 593.54
House Payment 1,000.00
Veterinary Services 139.41
Meals/Groceries/Handimart 296.07
Miscellaneous 254.56
Kirklands 109.94
Haircuts 55.00
Toy Store 144.76
Paintball Gun 258.20
Wal-Mart 894.61
Credit Card Companies 860.18
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$12,080.99
The evidence suggests, however, that Debtor did pay some of the subcontractors. From the $30,000 payment, Debtor made payments to Elie Shaheen, McCallum's Electrical Services, Cedar Rapids Tile & Marble, and Menards. Debtor did not, however, make payments to A'Hearn Plumbing, A.P.C. Emmert, Kelly Heating and Air Conditioning, or Yates & Yates. All of these unpaid subcontractors, except for Kelly Heating and Air Conditioning, subsequently filed mechanic's liens on the building being remodeled. These liens caused Plaintiff to be in violation of its lease agreement. In order to remove these liens Plaintiff was forced to pay these subcontractors a total of $18,760.85.
Plaintiff seeks to have the entire amount of the judgment issued by the Iowa District Court excepted from discharge. Debtor's brief asserts that only the funds used for personal expenditures should be excepted from discharge since Debtor used a portion of the funds towards the project.
§ 523(a)(2)(A)
Plaintiff asks for a finding that this debt is nondischargeable pursuant to § 523(a)(2)(A). This section provides in pertinent part:
(a) A discharge under section 727 ... does not discharge an individual debtor from any debt
...
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.
11 U.S.C. § 523(a)(2)(A) (2002).
Plaintiff must prove the elements of its claim under § 523(a) by a preponderance of evidence. Grogan v. Garner, 498 U.S. 279, 285, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Exceptions to discharge must be In re Van Horne, 823 F.2d 1285, 1287 (8th Cir.1987).
In the Eighth Circuit, a creditor proceeding under § 523(a)(2)(A) must prove the following elements: (1) the debtor made representations; (2) at the time made, the debtor knew them to be false; (3) the representations were made with the intention and purpose of deceiving the creditor; (4) the creditor justifiably relied on the representations; and, (5) the creditor sustained the alleged injury as a proximate result of the representations having been made. In re Ophaug, 827 F.2d 340, 342 n. 1 (8th Cir.1987), as modified by Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) ().
Plaintiff has satisfied the first three elements of § 523(a)(2)(A). The Court finds that Debtor knowingly made false representations, intending that Plaintiff rely on them. Debtor told Mr. Khairallah that the $30,000 progress payment would be used to pay subcontractors. Although Debtor paid several subcontractors, the evidence demonstrates that Debtor used a substantial portion of these funds on personal expenditures. Moreover, Debtor repeatedly reassured Mr. Khairallah that everyone involved with the project had been paid. These acts demonstrate Debtor's intent to deceive Plaintiff and induce it to rely on the misrepresentations.
The fourth element is satisfied. Plaintiff justifiably relied on Debtor when making these progress payments. Debtor held himself out as being a knowledgeable and experienced general contractor who had previously performed this type of work. Plaintiff had no way of knowing that Debtor would not follow through with his contractual obligation to pay the subcontractors.
The final element under § 523(a)(2)(A) is also proven. Debtor's fraud is the proximate cause of Plaintiff's damages. Had Debtor not fraudulently represented to Mr. Khairallah that he would perform as a general contractor and would pay subcontractors accordingly, Plaintiff would not have advanced him the money for labor and materials. Therefore, Plaintiff has proven all of the necessary elements under § 523(a)(2)(A) to except its claim from discharge.
§ 523(a)(4)
The Bankruptcy Code provides that an individual debtor in a Chapter 7 case is not discharged from any debt "for fraud or defalcation while acting in a fiduciary capacity...." 11 U.S.C. § 523(a)(4). To prevent the discharge of debt under § 523(a)(4), it is incumbent upon Plaintiff to establish the following two elements: (1) that a fiduciary relationship existed between Debtor and Plaintiff; and (2) that Debtor committed fraud or defalcation in the course of that fiduciary relationship. See In re Montgomery, 236 B.R. 914, 922 (Bankr.D.N.D.1999).
With regard to the first...
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